ECON 201_ Fall 2010_ Midterm 2 with solutions

ECON 201: Introduction to Macroeconomics
Midterm Exam 2: Answer Packet
November 8 2010
NAME: _________________________________
Circle your TA’s name: Brian Meysam Travis
Directions: This test is in two parts, a multiple choice question part and a short-answer part.
Use this answer packet to complete the exam. Calculators are permitted. Books, notes,
reference materials, etc. are prohibited. Good luck!
Part 1: Referring to the questions in the Multiple Choice Questions Packet, choose the one
alternative that best completes the statement or answers the question. Each question is
worth one point. There is no penalty to guessing, so be sure to answer all of them. Write
your answers in the following table using capital letters.
1 6 11 16 21 26
2 7 12 17 22 27
3 8 13 18 23 28
4 9 14 19 24 29
5 10 15 20 25 30
1. The word “externalities” has come up twice in the course so far. What of the following pairs
are the topics most closely related to externalities?
A) Market failure; excluded from GDP
B) Effect of government price ceilings and floors; excluded from GDP
C) Effect of government tariffs and quotas; market failure
D) Effect of government tariffs and quotas; excluded from GDP
2. According to a course packet reading, the success of South Korea in achieving rapid catch-up
to the income of the rich nations is partly due to
A) Free trade; letting free markets work
B) Free trade; industrial policy
C) Protectionism; industrial policy
D) Protectionism; letting free markets work
3. When a U.S.-owned McDonald's operates in South Korea, the profits that this firm brings back
to the U.S. are included in the U.S. ______ and the South Korea ______.
A) GDP; GDP
B) GNP; GDP
C) GDP; GNP
D) GNP; GNP
4. A policy that offers parents a tax reduction based on how much they are saving for their
children's college education should ______ the equilibrium level of loanable funds and ______
the rate of long-term growth.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
5. An advantage of the household survey over the establishment survey of the labor market is
that the household survey
A) includes the number of self-employed persons.
B) is based on actual payrolls, rather than on unverified answers.
C) includes the number of discouraged workers.
D) omits persons employed at newly opened firms.
6. Depreciation is
A) the value of worn-out equipment, machinery, and buildings.
B) the value of decrease in business inventory stocks.
C) the value of the addition to the capital stock.
D) the decline in the value of the stock market, net of dividends.
7. Which of the following will increase investment spending holding everything else constant?
A) An increase in transfer payments
B) An increase in government budget surplus
C) An increase in total consumption
D) An increase in government spending
8. The advice to retrain would be most appropriate for which of the following types of
unemployment?
A) Frictional unemployment
B) Structural unemployment
C) Cyclical unemployment
D) Core unemployment
9. The lecture disagreed with a graph in the textbook showing that
A) Output is negatively correlated with unemployment
B) Inflation is negatively correlated with unemployment
C) Output is positively correlated with unemployment
D) Inflation is positively correlated with unemployment
10. If your nominal wage rises faster than the price level, we can say your real wage has
________ and the purchasing power of your income has _______.
A) fallen; fallen.
B) fallen; risen.
C) risen; risen.
D) risen; fallen.
11. A country in which a significant fraction of domestic production takes place in foreign-owned
factories is most likely a country where ______.
A) GNP is much larger than GDP.
B) GDP is much larger than GNP.
C) GDP is equal to GNP.
D) GDP is not comparable to GNP.
12. The comprehensive production function developed in lecture includes which item that is not
included in the textbook’s treatment of economic growth?
A) Geography
B) Human capital
C) Political capital
D) Legal systems and property rights
E) A) and C)
13. Which of the following factors implies that official statistics may understate the
unemployment rate?
A) The problem of measuring the over time work.
B) The fact that some part time workers want to work full time.
C) The fact that some people stop searching for jobs after a while.
D) None of the above.
14. An unemployment insurance program has which of the following effects?
A) It decreases the amount of personal income of the unemployed.
B) It contributes to the severity of a recession or economic downturn.
C) It increases the amount of time spent searching for a job.
D) It lowers the overall unemployment rate.
National income $1000
Retained earnings not paid as dividend 50
Transfer payments 40
Interest on government bonds 20
Personal taxes 30
15. Refer to the table above. What is the level of personal disposable income for this economy?
A) $ 1,080 billion
B) $ 1,010 billion
C) $ 980 billion
D) $ 860 billion
16. Increasing the amount of consumption spending and reducing the amount of savings ______
investment expenditures, and ______ long-run economic growth in the economy.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
17. The real wage equals the nominal wage ______ the CPI, all times 100.
A) divided by
B) times
C) minus
D) plus
18. In a closed economy, there is a government budget surplus if
A) T-TR > G
B) G > T-TR
C) T > G
D) G > T
19. Which of the following can explain why some countries have not experienced relatively high
growth rates in real GDP per capita despite relatively low initial levels of real GDP per capita?
A) Many of these developing countries do not have a court system that can enforce
laws.
B) Countries that are relatively poor are more likely to experience wars and
revolutions.
C) Countries that are relatively poor are likely to have a lower quality of health care.
D) All of the above
20. The course packet reading on trade-adjustment assistance (TAA) concludes that a desirable
policy would be
A) Wage insurance for all people that lasts two years
B) Wage insurance for those aged > 50 that lasts forever
C) Wage insurance for all people that lasts forever
D) Wage insurance for those aged > 50 that lasts two years
21. When the actual inflation rates turns out to be greater than the expected inflation rate the
borrowers _____ and the lenders ____.
A) lose; gain
B) lose; lose
C) gain; lose
D) gain; gain
22. In years with positive growth and inflation, real GDP grows _________ nominal GDP.
A) faster than
B) slower than
C) at the same pace as
D) sometimes faster, sometimes slower, and sometimes at the same pace as
23. If an economy experiences deflation the real interest rate
A) will be less than the nominal interest rate.
B) will be negative when nominal interest rate is positive.
C) will be greater than the nominal interest rate.
D) will be equal to the deflation rate, so long as the nominal interest rate is positive.
24. The biggest difference between unemployment in 2009-2010 vs. 1982 is:
A) In 2009-2010 the official unemployment rate is higher
B) In 2009-2010 the percentage of forced part-time is higher
C) In 2009-2010 the percentage of long-term unemployment is higher
D) A) and B)
E) B) and C)
25. You are an economic advisor to the president. You are asked to recommend a policy to
promote long-term economic growth in the economy. Which of the following policies would you
choose?
A) A reduction in sales tax
B) An investment tax credit
C) A reduction in tax on luxury goods
D) All of the above
26. In the lecture’s introduction of hypothetical orders of magnitude of nominal GDP and its
components for 1929 vs. 2007, which of the following was shown?
A) Real GDP per capita increased by a factor of 10
B) Real GDP increased by a factor of 10
C) Nominal GDP increased by a factor of 10
D) The population increased by a factor of 10
27. Disposable personal income equals personal income
A) minus personal tax payments.
B) plus government transfer payments.
C) minus personal tax payments plus government transfer payments.
D) minus government transfer payments plus personal tax payments.
28. Which of the following would decrease the unemployment rate?
A) An increase in the minimum wage
B) An increase in the efficiency wage
C) An increase in labor union membership
D) Government aid to retrain unemployed workers
29. The purchase by an individual or firm of stock or bond issued in another country is called
A) foreign exchange arbitrage
B) foreign direct investment
C) foreign portfolio investment
D) global stock exchange
30. Long-run economic growth requires all the following except
A) technological change
B) increase in capital per hour worked
C) government provision of secure property rights
D) political instability
Short answer questions (30 points total)
Problem One (16 points, 1 point for each blank)
Let the supply and demand equations representing the market for a new type of phone, the
Iphoney, be given by
P = 2QS + 160 P = 1000-5QD
(a) Calculate equilibrium price and quantity, under the autarky. What are consumer surplus and
producer surplus under the autarky regime? (2 points)
Equilibrium Price 400
Equilibrium Quantity 120
Consumer Surplus 36,000
Domestic Producer Surplus 14,400
(b) Suppose the world price for Iphoney is $300. Now calculate the quantity of domestic
production, imports and domestic consumption and the consumer surplus and domestic
producer surplus under this new regime. Assume that consumers will first buy all units of
domestically produced Iphoney before going to international producers. (5 points)
Domestic Consumption 140
Domestic Production 70
Imports 70
Consumer Surplus 49,000
Domestic Producer Surplus 4,900
(c) The government imposes an import quota of 35. Calculate domestic consumption, domestic
supply, consumer surplus, domestic producer surplus, and dead weight loss. (5 points)
Domestic Consumption 130
Domestic Production 95
Consumer Surplus 42,250
Domestic Producer Surplus 9025
Deadweight loss 875
(d) How much government revenue is generated by this quota?
0
(1 point)
(e) What tariff amount would result in the same amount of 50
dead weight loss as in part (c)? (1 point)
(f) Under this new rule (compare quota and tariff) consumers _________ (1 point)
Are better off Are worse off Fare the same
And domestic producers __________ (1 point)
Are better off Are worse off Fare the same
Problem Two (6 points)
Assume that we face a closed economy. Justify your answers by providing the equations you
use to derive those answers.
(a) If GDP is 1500, Consumption is 700 and total investment is 350, what is the government
expenditure equal to? (2 point)
450
(b) Now if public savings is -100 how much is the private saving? (2 point)
450
(c) So far you know the level of public saving and G. If TR = 150, what is the level of government
tax revenue (T)? (2 points)
500
Problem Three (8 points)
Suppose that in a fictional economy three goods are produced. One is Chocolate beans, which is
an “intermediate good”, used in the production of the two other “final goods”. The final goods
are Hot Chocolate and Chocolate cake. Answer the following questions. (1/2 point each blank)
2008 2009 2010
Price Quantity Price Quantity Price Quantity
Chocolate 1.5 1200 1.7 1400 1.75 1500
beans
Chocolate cake 4 400 5 500 5.5 600
Hot Chocolate 3 800 3.5 900 4 900
Real GDP in 1. 2. 3.
2008 Prices 4000 4700 5100
% change (LN) 4. 5.
in real GDP at N.A. 16.12% 8.17%
2008 prices
Nominal GDP 6. 7. 8.
4000 5650 6900
GDP deflator 9. 10.
(base year 100 120.2 135
2008)
(b) Each unit of Chocolate beans can turn into either one unit of Chocolate Cake or one unit of
Hot Chocolate. Suppose that there is an extra production of 100 units of chocolate beans into
the country in year 2010. What is the value added in 2010 prices if the extra units of
chocolate beans are used to produce Chocolate cake? What about if it is used to produce Hot
Chocolate? (2 points)
Value added from Extra Production of Chocolate Cake 375
Value added from Extra Production of Hot Chocolate 225
(c) How much will the GDP increase in 2010 prices if 50 units of the extra Chocolate
475
beans are turned into Chocolate Cake and the other 50 units are turned into Hot
Chocolate? (1 point)